Using Brokerage Windows to Expand Your 401(k) Options

Are brokerage windows right for you?


Using the brokerage option offered through some employers’ 401(k) plans could be a good way to maximize asset class diversification and integrate the highest quality funds into your portfolio.

The brokerage window isn’t for everyone, though.

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401(k) brokerage windows

Most 401(k) plans offer 10 to 20 funds. A brokerage window, also called a self-directed option, works through a brokerage platform that gives participants access to hundreds or thousands of investment options. Some plan sponsors choose to limit participant access within the brokerage window so that retirement investors can’t purchase overly risky investments.

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The major advantage is obvious: A brokerage window allows investors to select the best and most suitable funds among hundreds or thousands rather than 10 or 20. There are, however, some disadvantages.

The cons

  • Many retirement plans won’t allow participants to establish automatic brokerage investments for contributions. Consequently, with each contribution, an investor needs to calculate buys and sells then manually make trades. This can be tedious and confusing for some investors.
  • Investing through a brokerage window can be more expensive than using the standard funds provided within a 401(k) plan. Because of the asset levels of some retirement plans, participants could have access to institutional share classes, which have lower fees. This applies to the standard fund offering in a plan but not always to a brokerage window. Also, many plans charge an extra administrative fee to use the brokerage window. Finally, placing trades in order to reallocate or rebalance an account could involve extra fees.
  • Too many choices could lead to stress for investors who are easily overwhelmed. Others take unnecessary investing risks simply because so many options are available.
  • A brokerage window could encourage a day-trading mentality among some investors. The fees associated with over-trading could rapidly decrease gains, and over-trading hasn’t historically yielded good returns for the average retirement investor.
  • Plan sponsors may limit the percentage of contributions and/or existing funds that can be invested through the brokerage option. Keeping investments well balanced becomes trickier under these circumstances.
  • Minimizing the cons and maximizing the pros of a brokerage window

    In many cases, the standard funds available in a retirement plan are well-rated investments with good expense ratios. There could be little to no investing advantage to using a brokerage window under these circumstances.

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    However, there are several instances in which the brokerage window could provide a more suitable retirement investing portfolio:

    • Some plans don’t feature highly rated funds for each and every asset class.
    • Some investors simply enjoy research and analysis. For these savvy folks, using a brokerage option could lead to increased engagement in long-term retirement planning—which is always good.
    • Knowledgeable investors interested in investing their retirement assets in a specific sector not represented in their core lineup could find what they are looking for with the expanded options.
    • If you could benefit from using your plan’s brokerage window, here are a few tips:

      • Minimize costs by seeking no-load funds without transaction fees. And check with your plan administrator to ensure the brokerage window administrative fee is reasonable.
      • Minimize time spent researching by using the well-rated funds, whenever possible, from your plan’s primary investing lineup. Only use the brokerage window to fulfill portions of your asset class allocation where good options are lacking within the standard lineup.
      • Don’t be a day trader. Resist the urge to check your 401(k) account balance daily and/or obsessively track your investments. Retirement investing is a long-term endeavor, so make investing choices that fit into a long-term plan. Aim to rebalance and reallocate quarterly or twice yearly.
      • Enlist the assistance of a professional retirement adviser. These folks will help you establish an appropriate asset class allocation and select the best funds to fit within your allocation. They’ll help you wade through the confusion inherent in making manual trades. And they can assist in crunching the numbers so you’re properly balanced across your brokerage and standard-lineup investments.
      • Remember that each person’s situation is different. What’s best for your retirement strategy may not be best for the person in the cubicle or office next door. Resist the urge to listen to any pundit who categorically endorses or denounces brokerage windows. These people generally offer a one-size-fits-all solution to retirement planning that may not actually fit you at all.

        Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal. Keep tabs on Scott on Twitter and Facebook.